The Syrian president, Bashar al-Assad, talks to reporters after the closing session of the Arab League summit this week. Photograph: Mohamed Messara/EPA

European Union diplomats in Syria work in a handsome stone house in the leafy Abu Rummaneh quarter of Damascus, guarded by machine gun-toting policemen at the gate. Their well-appointed offices are strewn with glossy brochures about the links between the EU and this Arab republic – testimony to valuable assistance programmes and ambitions for a mutually beneficial long-term relationship.

Yet there is unease about the way things are heading. Last October, after a decade of negotiations, the two sides were poised to sign an "association agreement" covering political and economic issues, trade and investment, modelled on those already concluded by the EU and its eight other "Mediterranean partners".

Lebanon, Jordan, Israel, the Palestinian Authority, Egypt, Tunisia, Algeria and Morocco have all put their relations with Brussels on a formal footing; maverick Libya is conspicuously absent from this "ring of friends". But Syria balked at the 11th hour, insisting it needed more time. The reasons tell an interesting story about President Bashar al-Assad and the view from Damascus.

The official line is that Syria has undergone significant changes since the text was initialled in 2003. A revised version took some of them into account: British and Dutch demands for special statements on human rights and weapons of mass destruction were defeated and the language used now is standard to all EU-Med association agreements.

Still, economic conditions have fuelled fears that the free trade requirements could endanger Syrian industries, though tariffs on EU goods are to be cut over long periods. Crushing competition from the Turkish textile market has served as a warning.

"We are reviewing the relevance of the text to the Syrian economy today," explains Abdullah Dardari, the deputy prime minister and architect of recent economic reforms. But there is much more to it than that. "Even a free trade agreement must be built on political understanding and trust," he says. "An EU foreign policy that respects Syrian and Arab rights creates more confidence – and makes the lives of technocrats and economists easier."

Beyond the crunchy detail of the agreement's 144 articles there is a litany of complaints that Syria deserves better. Europe's passivity in the face of the US-led war in Iraq – with British participation – is a big one. Others include the EU, led by France, blaming Syria for the 2005 assassination of the former Lebanese prime minister Rafiq al-Hariri, support for Beirut's "cedar revolution" and Syria's ejection from Lebanon after nearly 30 years.

Yet another is Europe's failure to challenge US policies towards Israel and the Palestinians, especially its refusal to talk to the Islamists of Hamas, Syria's protege – which, like Lebanon's Hizbullah, is considered a terrorist organisation on both sides of the Atlantic but a "resistance movement" in Damascus.

"Nobody is in a position to lecture us on human rights," insists another official, echoing Assad at his most combative. "The Europeans should have an independent position vis-a-vis Syria."

The western media is considered hostile too. Journalists who ask about the prospects for political change in Syria get angry answers about the boycott of Hamas, the invasion of Iraq or Israel's war on Gaza. More thoughtful responses explain that the president's priorities are boosting the economy, creating wealth and raising educational standards so his country can take its place in a globalised world.

Syrians have also noticed, like others before them, that the EU is less than the sum of its parts. "We used to have a Europe file but we've split it into separate countries – France, Germany and the UK," said Samir al-Taqi, the influential head of the Orient Centre for International Studies. "Europe no longer behaves as a unit and you get policies of the lowest common denominator."

And the Qatari and other Gulf Arabs flocking to Syria's newly liberalised financial and investment sector – the Damascus stock exchange is just a year old – do not share European concerns about Assad's domestic or foreign policies.

Worse, for Brussels and its representatives in Abu Rummaneh, is the sense that Syria cares more about its slowly improving relations with the US. Not a week goes by without some senior administration official or congressman arriving from Washington, often invited for a flattering one-to-one at the presidential palace. The US ambassador was withdrawn after the Hariri killing, but a newly appointed one is eagerly awaited.

Americans and Europeans are both wooing Syria because of its strategic position in the Middle East – its role in any peace process, its co-operation in fighting jihadi terrorism and stabilising Iraq and its capacity, if excluded, for troublemaking, as Iran's main Arab ally and supporter of "resistance movements". "For Syria the carrots are just not tempting enough," argues Rosa Balfour of the European Policy Centre in Brussels. "It can ignore Europe because its political role is so important." The gloomy conclusion is that, despite reassuring noises, the agreement with the EU may not be signed any time soon.

The feeling in Damascus is that Syria has come through a tough period and survived to realise that it still holds cards that others badly want it to play. "Five years ago things looked really bad for this regime – with Lebanon, Iraq, Bush and the neocons," says a Syrian intellectual who is privately critical of Assad. "Now look. Are these guys very smart or is it just that the rest of the world really needs them?"